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Student Loan Consolidation and Payoff
Be wary of companies charging a lot of money for a free government program. Consolidation is similar to refinancing a loan. You can consolidate all, just some, or even just one of your student loans. Consolidating federal student loans may be a good strategy to lower monthly payments or to get out of default, but it is not always a good idea. The interest rates for consolidation loans are calculated based on the average interest rates of the loans that you are consolidating. If you have variable rate loans from before July 1, , you may be able to get very significant interest rate reductions by consolidating. Borrowers with more recent loans may also get a benefit now that interest rates are changing each year. You should check the interest rates on your loans. If you are close to paying off your loans, consolidation may not be worthwhile. You may lose some rights by consolidating. This is most clearly a problem if you consolidate federal loans into a private consolidation loan you would lose the rights associated with federal loans. You may also lose some options and protections if you consolidate certain federal loans, particularly Perkins loans , into other federal loan programs. Parent PLUS borrowers who also have other federal student loans and choose to consolidate with Direct Loans will find that the PLUS loan taints the entire consolidation loan and will mean that they will not be eligible to repay the consolidation loan using income-driven repayment. These borrowers should also be able to consolidate and choose ICR. This is not as useful as it used to be for most borrowers since nearly all new federal loans are made through the Direct Loan program. The Department of Education says it is trying to place borrowers with multiple Direct loans with a single servicer. Consolidation might help you if you need to reduce payments on your loan through an extension of the repayment period. Extending the length of repayment increases the total amount you have to repay over the life of the loan. You may get an interest rate break, especially if you have variable rate loans. Consolidation is one way to get out of default and back into current repayment. As you weigh the pros and cons, keep in mind that timing is critical. With just a few exceptions, you get only one chance to consolidate with the government loan programs. It is very dangerous to consolidate federal loans into a private consolidation loan. You will lose your rights under the federal loan programs once you choose to consolidate with a private lender. Federal Government Consolidation Loans Direct consolidation loans are now the only type of federal student consolidation loan. Loans that are not eligible for consolidation include state or private loans that are not federally guaranteed. This means, for example, that a Perkins Loan on its own cannot be consolidated into a Direct Loan. You may consolidate with Direct Loans during grace periods , once you have entered repayment, or during periods of deferment or forbearance. Borrowers in default may also consolidate in certain circumstances. Consolidation was previously available to borrowers while they were still in school. Congress eliminated this right in Congress also eliminated joint consolidation for spouses, effective July 1, However, once you consolidate, you lose any remaining grace period. You will generally receive your first bills within 60 days after the new Direct Consolidation loan is made. The good news is that the Department explains on its web site that if any loan you want to consolidate is still in the grace period, you can delay entering repayment on your new Direct Consolidation Loan until closer to your grace period end date. You can indicate this when you apply, and the consolidation servicer will wait to process your application until the appropriate time. Click espanol to find a Spanish version of the on-line application. The Department strongly encourages borrowers to apply on-line, but you may also download and print a paper application to submit by regular mail. The Department provides the following contact information if you have questions: To ask questions about consolidating your loans before you apply for a Direct Consolidation Loan, contact the Loan Consolidation Information Call Center at If you submitted a paper application by U. You will need to sign in using your personal identifiers and PIN. The electronic application consists of five steps: Choose loans and servicer. You must select a servicer. You are required to select from the choices listed by the Department of Education. If may make this choice on-line or if you are sending in a paper application , you should send directly to the servicer you choose. It is hard to know which servicer to choose. Repayment Plan Selection 4. Borrower and Reference Information, and 5. You will get a summary sheet after you apply. It is very important to review this sheet and check to make sure all of the loans you wanted to consolidate are included in the new consolidation loan. Be sure to meet the deadline for responding if you think there are problems with the consolidation or if you have decided you do not want to go forward. Joint Consolidation Loans Prior to July 1, , married borrowers could choose to consolidate federal student loans from both spouses or jointly consolidate the loans of either spouse. Both borrowers had to agree to be jointly and severally liable for repayment. This obligation continued even after divorce. Not surprisingly, this caused a lot of problems for borrowers and Congress eliminated the program as of July 1, There are still many borrowers struggling with joint consolidation loans. There are numerous problems that can arise—for example, if one of the divorced ex-spouses wants to apply for IBR. Both spouses are jointly liable for the loan and both must request IBR. Another common problem is that partial discharge of a joint consolidation loan under any of the discharge programs other than death discharge does not eliminate joint liability for the remaining balance. Further, borrowers with joint FFEL consolidation loans, according to the Department, may not reconsolidate into Direct Loans and therefore are not eligible for public service loan forgiveness. Loan Terms, Fees, and Limits Interest rates for consolidation loans are fixed. The fixed rate is based on the weighted average of the interest rates on the loans at the time of consolidation, rounded up to the nearest one-eighth of a percentage point. The interest rate must not exceed 8. However, the interest rate may be greater than 8. Consolidation loan borrowers should not be charged origination fees. If you have an eligible loan that was not included in the first consolidation and you include that loan in the new consolidation. The eligible loan could be a new loan you received after the initial consolidation loan. It is a good idea to do this even if you just think that you might want to use the public service cancellation program. The sooner your payments start counting toward the ten year cancellation period, the better, or Military service members are also allowed to re-consolidate to take advantage of the limits on interest accrual for Direct Loans. Private Consolidation Loans Borrowers cannot consolidate private student loans with the federal consolidation loan programs. However, if you have private loans, you may want to think about consolidating these loans into a new private consolidation loan. This may be a good idea if you want a single monthly payment. You may also be able to get a better deal if, for example, your credit score is better now than it was when you first took out the private loans. These include deferment, forbearance, cancellation, and affordable repayment rights. Also, federal consolidation loans generally have lower interest rates.
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